Private sector IR35 update on the horizon yet in change lies opportunity
Interim Management is the means by which an individual provides professional services to a client-base of their choosing. It is typically delivered by highly skilled, senior individuals, whereby the services they render are often a blend of strategic and operational, delivering along a project timeline. Once complete, the interim manager will then find their next value-adding assignment.
For years, HMRC has raised concerned that certain ‘contractors’ might be operating in a way to avoid paying an appropriate amount of income tax and national insurance contributions. Hence the age-old introduction of IR35 rules to govern how people in business by themselves can genuinely demonstrate they are not a disguised employee.
This has been met with a mix of views over the years depending on which side of the fence you sit. In short, there are three areas that a person in business by themselves needs to demonstrate: control, substitution and mutuality of obligation. However, a key feature of the IR35 rules is that the interim manager has been responsible for determining their tax status in relation to the services they deliver. the interim manager has been responsible for determining their tax status in relation to the services they deliver.
Change is coming
From April 2020 these rules are changing under the title of Off-Payroll working, meaning it will now fall on the end-user client to assess each new project case by case. Where you, the client, determines the project firmly meets the criteria for a b2b relationship then the interaction with the interim manager will operate much as it does today, so business as usual.
But where you decide the project looks more akin to an employee relationship (for tax purposes), then the (tax) relationship will mean the organisation that settles the interim’s invoicing will now be responsible for making statutory tax deductions.
But what does that mean in practice, and how far-ranging will the changes go?
HMRC is saying these new rules will not apply to SMEs where two out of three criteria are met: turnover of £10.2 million or less, £5.1 million or less on the balance sheet; less than 50 employees.
Which means many early stage biotech’s and start-ups will not be burdened by the new regulations, implying such companies will continue to engage external talent on an interim basis as they have been doing to date. Business as usual then for many.
Larger companies seem to be applying a one-size fits all assessment and will likely deem all current and future contracts to fall within scope of the new regulations. This will seem unfair to many, and in several cases, there will be contracts that are genuinely out of scope but now automatically deemed in scope. This could lead to an exodus of talent as those genuinely providing a b2b (out of scope) service will now look for projects that respect their working position.
But it’s likely that there will be many people who decide to take the in-scope decision on the chin, and begrudgingly accept to operate under the PAYE remit. Undoubtedly, there will be some disruption as interim talent departs to source out of scope work whilst others spend time internally renegotiating their position in Q1 2020.
Conversely, we have seen a promising number of mid-sized businesses assessing contracts individually, seeking to make an in / out of scope assessment linked to the exact circumstances behind the business need and the service being delivered. Those businesses are likely to hold on to the interim talent they are currently engaged with because where a contract is reinforced to operate out of scope, the interim will be reassured the business is respecting their offering and model. Where a contract may now be deemed in scope, it’s likely the engagement at a personal level will help an interim reach an informed decision as to why they may need to adjust their tax position after April 2020.
So, interesting times ahead as we navigate how the business community, service providers and interim managers alike respond to the changes in this slightly new territory. What is clear though is that businesses will continue to drive results through people and some of those people will be experts drafted in on an interim basis. The growth of the ‘gig economy’ isn’t going to go away simply because of an update to the tax rules.
Let’s have a conversation.
Managing Partner, Executive Interims, The RSA Group
D: +44 (0) 20 3818 8831